RAILA warns international investors against putting their money in Kenya’s next Eurobond

... risk of being converted into or being declared anOdious Debton the basis of threewidely acknowledged testsforOdious Debt:

a.Absence Of Consent:That the Eurobond debts were incurred without the consent of thePeople of Kenya(in respect of any portion of the proceeds not deposited into the Consolidated Fund)

b.Absence Of Benefit: That the expenditure of the Eurobond Proceeds were not applied towards the public benefit or for the intended purposes to fundInfrastructure Projects(in respect of the expenditure from the Eurobond proceeds that the National Treasury cannot account for or provide a list of projects funded by the Eurobond .

c.Creditor Awareness:thatlenders, investors and theinternational banksthat acted as transactions advisors in Kenya’s Eurobond (and any proposed Eurobond issue) were aware, or should have been aware, of the above two conditions. Specifically Investors need to demand resolution of theunaccounted for proceedsand all unresolved matters on Kenya’s 2014 Eurobond prior to participating in any proposedfuture sovereign bond issue.

14. The Republic of Kenya has an excellent record since independence of honouring all its obligations including sovereign debt owed to external creditors and international capital-markets institutions. The Government of Kenya bears the responsibility of addressing and resolving to the satisfaction of the National Audit Office the significant and material issues raised in respect of Kenya’s 2014 Eurobond.

15. The inability of the National Treasury to account for expenditure from the Proceeds of the 2014 Eurobond and toprovide a list of projects funded by the Eurobondis evidence that thesource of repayment of the Eurobond is uncertain and unknown. Further the National Treasury has not made or is unable to announcetangible financial arrangementsforrepaymentof the principal outstanding amounts of the Eurobond on maturity,for example by establishingSinking Funds from annual Budget revenues.

16.This places Kenya at risk of sovereign default.At theminimum it places Kenya inAPre-Default Stateand heightens the risk ofexternal debt distressthat could lead tosovereign default- and the attendant painfulSovereign Debt Restructuring(SDR). Both outcomes place the Country at risk ofCollective Action Clausesby institutions and investors who subscribed to the Kenya’s inaugural Eurobond of June 2014. They could enforce their rights under the laws of the State of New York in the United States (following the example of the actions of Vukture funds in Argentina’sSovereign Debt Restructuring).

17. In the event of harsh and painfulSovereign Debt RestructuringKenyan taxpayers face the risk of paying for thetough fiscal conditionsthat are likely to be imposed byprivate creditorsand investors who subscribed to the 2014Eurobond.The IMF by virtue of the USD 1.5bn Standby Arrangement (SBA) and Standby Credit (SBC) Facility that it extended to Kenya in March 2016 could also impose further conditions.

VI. NEED FOR AN INDEPENDENT EUROBOND AND NATIONAL EXTERNAL DEBT AUDIT

18. The Government needs to facilitate anindependent, international auditof Kenya’s 2014 Eurobond and thenation’s external debt prior to accessingthe international capital markets for the second Eurobond issue proposed.

19. We make the call for anIndependent, international audit of Kenya’s 2014 Eurobond, this would be aSpecific Eurobond Debt Auditcovering the receipt, accounting and use of the Net Proceeds of theinternational sovereign bond.We recommend that this specificEurobond Debt Auditbe undertaken by an international audit firm working jointly with theIndependent Evaluation Office (IEO) of the IMF,theAfrican Development Bank (ADB) and UNCTAD.

20. We also recommend anIndependent, international auditof Kenya’sNational External Debtthat goes beyond the currentDebt Sustainability Assessment(DSA) framework. This debt audit needs to cover allnational external debt owedbilaterally and multilaterally. Critically it must cover allnational external debtcontracted from the international capital markets and ensure that there are no hidden or previously undisclosed borrowings. This recommendation is consistent with the IMF’s call for an independent international audit of an International Bond wasnot disclosed to the executive agencies of an emerging country nor approved byits legislature as required.

21. TheNational Debt Auditsabove should also comply with theUN Principles on Promoting Responsible Sovereign Lending and Borrowingespecially the key principles onAgency, Due Authorization, Responsible Credit Decisions. In the context of Kenya these include:

a.Agency Principle:that Kenya Government Officials involved in the 2014 Eurobond transaction (and any proposed Eurobond issuance) are responsible to thecountry and the people of Kenyaforprotecting the public interestfor which they are acting as agents.

b.Due Authorization Principle:thatlenders and investors in Kenya’s Eurobond (and any proposed Eurobond issue) bear the responsibility of determining, to the best of their ability, that the Eurobond is appropriately authorized under Kenyan laws; and that the resultingSovereign Bond Agreementsare valid and enforceable under relevant jurisdictions.

c.Responsible Credit Decisions:thatlenders and investors in Kenya’s Eurobond (and any proposed Eurobond issue) bear the responsibility of making realistic assessment of

Kenya’s borrowing capacityandability to service its Eurobond debtsbased on the best available information.

22. Recent international experience of the concept of odious debt include discussions on Iraq’s debt in theOdious Debt Termsby Nobel laureate and economist, Joseph Stiglitz. in 2008 Ecuador declared its debt to beillegitimateon the basis that it wasOdious Debt

23. We also call on the International financial markets and investors active in the sovereign Bond market to require, through theTransaction Advisors,

a.post disbursement (post-ante) verification and monitoring of projectsfinanced by the 2014 Eurobond and

b.prior (ex-ante) investigations and verification of the projectsto be financed by any proposed future Eurobond to be issued by the republic of Kenya

VII. CAUTIONARY NOTICE AND NOTIFICATION OF MATERIAL FACTS TO INVESTORS

24. We wish to formally issue aCautionary Notice and Notification of Material Facts(stated below) toLegal Counsel, Lead Managers and Transaction Advisorsengaged or proposed to be engaged and potentialInternational investors(hereinafter collectively “Named Persons/Entities”)by the Republic of Kenya on the planned issue of its second Eurobond.

25.We wish to place On NoticetheNamed Persons/Entities(as defined above) that the Government of the Republic of Kenya hasnot accounted for the receipts and expendituresof the Net Proceeds of the International Sovereign Bond issued on24 June 2014as required under theConstitution of Kenya, 2010and thePublic Finance Management Act 2012, and to the satisfaction of the Constitutional National Audit Office. Further we caution the International markets that the Government of the Republic of Kenya needs to account completely for theNet Proceeds of the Eurobondprior to the Issuance of any new International Sovereign Bond.

26.We further caution and serve noticethat should the aboveNamed Persons/Entitiesproceed with the issuance ofany new International Sovereign Bond (Eurobond)by the Government of the Republic of Kenyawithout satisfactory resolution of the unresolved matters raised in respect of the 2014 Eurobond,then theNamed Persons/Entitiesrisk declaration of such debt asOdious Debtby the Government of Kenya, acting on behalf of thePeople of Kenya.

27. ThisCautionary Notice and Notification of Material Factsis based on theConcerns and Significant and materials Unexplainedand UnresolvedIssuesthat arose from the International Sovereign Bond Issued by the Republic of Kenya on 24 June 2014 which are presented above.